The scramble for housing
policy at the start of 2010

The housing market crash expected in
2007 never happened, and as house prices reinflate British politicians are
looking for housing policies.

Ben Read of the Centre for
Economics and Business Research published his view of the reinflating
housing market through to 2012. He considers that average house prices by the
end of 2012 will be around 15% higher than they are today. After the event Read
ridiculed those who had expected a house price crash based on the evident
disconnection of the British housing market from household incomes:

'Some experts would even have us
believe that there is some fundamental long term ratio between average incomes
and house prices, that virtually rules out every other factor... The same
experts have for years been telling us that house prices are set to fall by
over 30 per cent, a prediction that gets recycled over and over again, thus
getting further and further from being right. Even during this - the housing
market crash to end all crashes - prices fell by 22 per cent from
peak-to-trough, but now stand just fifteen per cent lower than the end of 2007
peak.' (1)

It appears Read may be talking about
England, but the same observation applies to England, Wales and Scotland
combined. His view seems to be that the British housing market will recover to
2007 peak average prices by 2012. Depending on which indices the CEBR are
looking at, that may mean average British house prices of between
£230,000 on the realistic FT index, and £195,000 on the cautious
Nationwide index. Rightmove's index has been more volatile than the FT so it
may be disregarded, and the CEBR may have access to other indices.

The CEBR are in our view
understating the situation. Our view is that by the end of 2012 average British
house prices will be between £285,000 and £230,000. The top of that
range is a 35% increase on the FT index at the end of 2009 by the end of 2012.
(2) The bottom of our scenario more or less equates with the top of the CEBR
prediction of a 15% rise.

I would prefer the CEBR to be right.
But as Read recognises, '... the dramatic collapse in housebuilding in the last
two years will feed through into prices over the next five years.' (1) He
doesn't quantify the collapse, but we have. We have also better quantified the
500,000 homes that should be built every year, against the 100,000 that
probably will be built for at least the near future that bothers the CEBR.
(2)

Unfortunately too, the experience of
2007 to 2009 has not been "the housing market crash to end all crashes". A
further housing bubble is forming, and will of course burst at some stage.
Perhaps it will burst before 2020, but we see no reason why house building will
increase much over that period. House building may decline further. A burst
need not be a "crash" then either. As the CEBR recognise, household incomes
have disconnected from house prices. A fact that the Treasury ignores when
repeating New Labour's housing rhetoric:

'Government is committed to
promoting the long-term stability of the housing market and meeting the long
term challenge of increasing the housing supply, including through releasing
more public sector land for housing, while providing support to homeowners
through these difficult times.' (3)

Britain's house builders and the
materials manufacturers who supply them had hoped for some support for their
collapsing sector of the construction industry in the Treasury's Pre-Budget
Report. This was eventually published on 9 December 2009, via a vacuous
"microsite" on http://prebudget.treasury.gov.uk. They got
little encouragement.

Chancellor of the Exchequer Alastair
Darling was all too quick to praise New Labour, claiming that '... the
Government has led the international response to the financial crisis
mitigating its impact on the global economy.' (4) All Darling's effort in
protecting the financial system, and mortgage lenders in particular, has
successfully reinflated the housing market. While new house building continues
to collapse the price of protecting the financial system has yet to be paid.
However Darling avoided any explanation of how he was to cut public
expenditure, or raise taxes. 2010 is an election year, and Darling was keeping
quiet.

If new house builders and their
supply chain felt unloved, it was clear that the construction sector as a whole
would face a tough few years as public investment is drawn forward for the
election year, and then cut.

The Brickonomics blogger
Brian Green recognised that net investment of £45.3bn went into
construction in 2008-09, which was more than the £37.7bn estimated in the
Budget. 'The 2009-10 figures are £49.5 billion against £43.8
billion and the 2010-11 figures are £39 billion against £36
billion.' (5) This observation also suggested to Joey Gardiner in
Building that '... the government is pumping money into construction
faster and intends to do so for a year or so more. But the extra money suggests
a larger fall when it comes. In 2011-12 public sector net investment drops to
£29bn. This then falls to £22bn in 2013/14.' (6) There is a certain
cynical resignation in New Labour's dealings with the construction sector, but
they are in a real predicament. They could not afford to let the financial
system collapse, and their intervention is yet to be paid for.

Alastair Darling

Darling can't help Britain's construction industry, or
house builders in particular. He can't force new house building from the
private sector developers, who share his interest in "planning gain". He can't
easily afford to pay for very much more new housing through Registered Social
Landlords and the negligable public sector. He knows that the failure to build
only serves to strengthen his effort to reinflate the housing market. He will
not like the political consequences of building so few homes every year, but he
would like the housing market to deflate even less. He hoped in 2008 that
renewed house price inflation would revive the ability of developers to realise
"planning gain", with some of it recovered by government. But those revenues
will be reduced.

The idea of "planning gain" is a
consequence of a new home costing more than an existing one. Not an obvious
state of affairs when a new car or a new pair of trousers always lose value
when they are used, unless they have some value other than their utility. Every
new home built enters the second-hand home market. If the cost of management
from land acquisition through building to sale, the cost of the land, and the
cost of constructing that new home is less than sale price into the existing
housing market, the developer is seen to have gained by the planning approval.
It has become customary for developers to negotiate with local and regional
planning departments to pay a share of the value of the benefit of planning
approval back to the public body awarding the approvals. This is formalised in
a Section 106 agreement, or a "planning obligation" on the part of the
developer. Not all agreed obligations are actually fulfilled, of course,
because the planned development may not go ahead, but the vast majority do
proceed and are honoured.

Adam S. Posen, a senior fellow at
the Peter G. Peterson Institute for International Economics, was appointed by
Darling to assist the Monetary Policy Committee of the Bank of England. Posen
had suggested that the Treasury might raise revenues by a "Capital Gains Tax"
on private house sales. While the scope for extracting revenues from "planning
gain" in the building of 100,000 new houses a year is diminished, taxing an
inflating housing market based in the stock of 26 million existing homes, 70%
of which are privately owned, is potentially a large revenue for any
government. Such a policy also offers the illusion that government can control
house price inflation by stiffening the tax, at a time when near zero interest
base rates cannot be instrumentally adjusted without affecting the wider
economy. (7) However if Darling liked Posen's policy innovation he said nothing
about a "Capital Gains Tax" on private house sales in the Treasury's wordy but
contentless Pre-Budget Report. Darling may think the home owning
electorate is not ready for such a tax.

A home is not capital. It is a
utility. Taxing gains in the inflating housing market will be a confidence
trick, it is desperate, but it may win support if handled by a clever enough
Chancellor of the Exchequer who has few other choices. We are likely to see a
political scramble for housing related policies in the first few months of 2010
as New Labour and the Conservatives get ready for the general election. Along
with Posen's idea, there will be other policy innovations that either party
might try to make it appear that they take the disconnection of house prices
from household incomes seriously. Politicians are genuinely worried.

The denial of development rights in
the 1947 Town and Country Planning Act contained the working population of
Britain, preventing the building of low cost housing on cheap farmland. The
1947 Town and Country Planning Act promised New Towns and council house
building. Greater house building was a contest until the late 1960s, when the
British economy could no longer afford to honour the political promise. We have
seen a politically charged reduction in housing production since
then.

We may be about to experience a new
phase in the containment of the workforce, if all parties abandon the attempted
expansion of owner occupation. 70% of households in owner occupation is plenty
as an electoral majority for any government. There could be a flourish of
innovation in rental housing policy using the planning system.

Planning policies to encourage
institutional landlords might appeal to The City. Rental housing can be built
for a percentage profit on the cost of construction, and the land kept in a
Community Land Trust, or new forms of Local Housing Trust, after the first
negotiation over "planning gain" to fund infrastructure. The subsequent
inflation of property values would accrue to the LHTs. That might have wide
appeal, from top of the market developers in posh areas, to self-appointed,
unelected, "concerned" groups of local residents. This will be misunderstood as
democratic.

Tenure has always been of interest
to planners, who fantasise about engineering a social mix. Planning
led prescription of tenures will link up with the promotion of
uncontroversial housing schemes. Architects will get excited by a
plethora of LHT schemes, and professionals will make their fees out of the
protracted attempt to make planning ever more "inclusive" and "consensual".
Housing Associations might feel a little unloved, or even threatened, but
Registered Social Landlords could metamorphose into LHTs too, and go for both
public funding and finance from The City. The larger RSLs are already adept at
this.

The inflation in the home ownership
dominated British housing market will keep rentals high for institutional
landlords who will easily compete with the smaller buy-to-let landlords, and
the rump of old-fashioned bourgeois-landlords. They will stand well alongside
the RSLs, and the increasingly privatised management of bottom of the market
council stock. Some politicians with a sentimental attachment to the idea of
social housing may prefer a daft attempt to raise council house building to
5000 homes a year, along with the attempt to push RSL production up to around
45,000. It may be rather easier to privately finance institutional landlords,
who may be metamorphosed speculative developers. Their new house building will
not be in addition to the expansion of publicly financed social housing. It
will be instead of expanding that sector.

Public funding can be trimmed to
keep the middle class Housing Association incompetents inefficiently producing
around 30,000 a year, or less. Institutional landlords can look philanthropic
by offering "affordable" rents, and an initial target market of 20,000 homes a
year may not be unrealistic. The private house builders will be reduced to
building 50,000 luxury eco-homes a year, mostly as architect designed low
density developments with a few penthouse type schemes in prime locations. The
political pressure will be off capital funding affordable housing,
and the negotiation on planning gain can go into infrastructure
budgets.

Landowners lucky enough to get
planning approval will have been told by RICS members that they should
negotiate harder over "planning gain". Land with a chance of planning approval
will soar in value. The overall housing market will inflate to the satisfaction
of a vast electoral majority.

The next government can then appear
to be the enemy of speculators by slapping a Capital Gains Tax on
private housing sales. This will allow the Treasury to centrally recover the
value of inflation the state has driven into the housing market by the
operation of the planning system.

The membership of the Council of
Mortgage Lenders will be secure. They can expand the fund of mortgage lending
more gradually as average house prices approach between £450,000 to
£350,000 before 2020, albeit with some faltering along the way. The scope
for upward social mobility will be slight. People will be able to move
geographically, but will struggle to trade up to better housing, except by way
of inheritance. The environmental mantra will be dont move 
eco-improve!

The diminution on construction
materials in the new build sector will be long term. This will be partially
offset with rather more refurbishment and extension work, but it will be a
reduction in production overall. Refurbishment has the advantage to government
that it is labour intensive, and so will be promoted as Green job creation, but
it will be less than politically or economically dynamic. The CML will like the
emphasis on refurbishment too, and their members will innovate new ways to fund
institutional landlords in parallel to the finance they already extend to the
customers of the membership of the Home Builder's Federation. An organisation
that will no longer represent commercial house builders committed to building
in "volume", but content with the polarised luxury and subsidised markets in
"eco-homes".

The alternative is unthinkable for
the government. The alternative is to re-establish in 2010 the freedom to build
on freehold land denied by the 1947 Town and Country Planning Act. That would
collapse the housing market in Britain and seriously threaten the financial
system that depends on house price inflation. A prospect rejected by every
British politician devoted to advancing the interests of The City, in their
elite dependency on the support of the electoral majority of home
owners.

Politicians like Darling are
genuinely worried. Yet they can do little to make housing "affordable" without
threatening the security of mortgage lenders. The Treasury is predictably clear
that it wants '... a strong, thriving and responsible financial sector.' (8)
While taking '... a leading role on international climate change,' and
providing '... domestic support for business investment in low carbon growth.'
(9) That means accepting a reduced house building sector in a construction
industry that faces cuts in public spending towards the mid-term of the next
government. More work in refurbishment of the existing building stock is a poor
substitute for contracts to build new developments.

The scramble for housing policy in
time for the election is about to begin.

There is a lot more to be cut or
taxed in the British economy. Darling has proposed marginal "savings" in the
£30 billion Housing and Environment sector, (10) and has barely
identified where these are to be made:

'£340 million from improved
targeting of regeneration and housing growth funding, concluding the New Deal
for Communities programme, prioritising regeneration and growth programmes to
maximise value for money as the economy recovers, and saving public money by
directly tackling the barriers to housing growth with a reduction in the impact
of regulation on house building. The Government, will assess the efficiency and
effectiveness across government of interventions to tackle worklessness and
promote growth and inclusion in deprived areas, and the institutions that
deliver them.' (11)

Watch out for "worklessness". The
British suffer from low pay. There is plenty of work around, but household
incomes are poor. Housing costs make that predicament acute, and no-one knows
that better than Yvette Cooper. She was appointed as Chief Secretary to the
Treasury on 24 January 2008 to help Darling tackle the bursting of the housing
bubble. Prior to that she was responsible for housing and planning at the
Office of the Deputy Prime Minister from 9 May 2005, itself replaced by the
Communities and Local Government ministry on 5 May 2006. Yvette was appointed
Housing and Planning Minister at the CLG on 28 June 2007, and has attended
Cabinet since then. On 5 June 2009 Yvette was reshuffled by Gordon Brown to be
the Secretary of State for Work and Pensions. She will be struggling with the
simple fact that British household incomes have become disconnected from the
cost of housing, and that inflated house prices are a poor substitute for a
pension.

Cooper and Darling will be torn, if
they survive the election in office. They will talk about cutting back on the
many Quangos in the construction sector that serve as a job creation scheme for
middle class reformers. But they will face the additional cost of redirecting
old and inventing new Quangos to address the supposed worklessness of
construction workers.

Whatever the electioneering result
the number of new homes built will be around a fifth of the minimum number
needed each year, and the CEBR's prediction for house price inflation may be
seen to be low.

We may even see a new institutional
house building sector enter the graph as the other three continue to decline.
Britain's politicians will be on the boards of directors, promoting corporate
social responsibility.